What's up guys and welcome back to wall street millennial on this channel, we cover everything related to socks and investing by this point. We all know that russia's economy has been devastated by economic sanctions from the western nations as a leading economic superpower. Sanctions from the us have been the most significant economists believe that russia's economy could shrink by as much as 10 in 2022 and inflation could soar to 20 percent. The most important aspect of a prolonged military conflict is having the money to sustain it with economic sanctions.

The us has dealt a crushing blow to putin's war machine without putting a single boot on the ground, but how does the us have so much power? It all comes down to the us dollar status as the world's reserve currency coming out of world war ii, europe, japan and the soviet union had their cities destroyed by years of bombing. The u.s was the only major country with its industrial capacity still intact. They used this advantageous position to negotiate the bretton woods agreement in 1944, which established the us dollar as a world reserve currency. Within just a few years, america was able to replace britain as the global financial superpower.

This ushered in a new world order, where almost all large international transactions were done in dollars. If you want to run an international business anywhere in the world, you need us dollars. Dollar dominance has given the u.s two key advantages. Firstly, is allowed the country to live beyond its means for decades, importing more than exports and having artificially low consumer prices.

Secondly, the us can weaponize the dollar to inflict crushing blows on its political adversaries. Us administrations have used this strategy for years. Targeting countries like iran and venezuela, these are relatively small countries who are not terribly important within the world economy. But now the binding administration has set its sights on the biggest target, yet unleashing the full force of economic warfare against the russian federation.

While russia's economy has stagnated in recent years, it is still the 11th largest in the world, with 1.5 trillion dollars of annual gdp and hundreds of billions of dollars worth of foreign currency reserves in an action of unprecedented scale. The us and its western allies have frozen 300 billion dollars of the russian central bank's foreign reserves. In real terms, this amounts to perhaps the largest drug pull operation in world history. U.S financial institutions are now required by law to cut off relationships with their russian counterparts, effectively freezing billions more in russian owned assets.

At the end of the day, us dollars are pieces of paper that only have value, because people think they do, and this value has been supported by trust in the u.s financial system built up over the past 70 years. Over the years, the us has used the dollar to its advantage in ever increasing ways with the russian sanctions. We may be finally reaching a breaking point, so what does it mean for the us dollar to be the world's reserve currency? The value of a nation's currency is determined by supply and demand. The country produces a certain amount of output per year.

The government issues a certain amount of currency, the more currency you issue the more dollars it will cost to buy any given good. It's the job of the central bank to gradually increase the money supply over time to match the rate of real economic growth, thereby maintaining a stable rate of inflation, but the us dollar, as a global reserve currency, complicates this picture when the fed prints more money. This seeps into the real economy and people have more money to spend, but not all of this is spent on us-made goods. Much of it is spent on foreign imports.

Over the past 30 years, the us has run a balance of payments deficit with the rest of the world, meaning that it imports more than exports. This deficit reached a record high of 850 billion dollars in 2021, is on track to be even higher. In 2022, there's been a massive net inflow of goods coming into the us, but how is that possible? Why are foreign countries willing to send more to the us than they get back in return? It all comes down to the power of the us dollar. Foreigners want to get their hands on dollars.

Multinational corporations want to increase their dollar reserves for use as working capital, and importantly, foreign central banks build up massive war chests of us dollars which they can use to support the exchange rate of their own currencies. During times of crisis, the excess foreign demand for dollars gives the federal reserve a tremendous amount of latitude to print money. For example, the us increased the money supply by almost 50 since the beginning of the pandemic, while inflation did increase. A lot of these new dollars were soaked up by foreign buyers.

The u.s status as reserve currency makes hyperinflation all but impossible, no matter how reckless the federal reserve gets with the money printer. In practical terms, this can be seen as a relative overvaluation of the us dollar exchange rate, an item that would cost one dollar in the u.s cost: 92 cents in the uk, 76 cents in italy, 65 cents in china and just 36 cents in russia. Because of this u.s, consumers can buy foreign imports for a fraction of the cost to produce them domestically, but how's. All this relate to the current situation in russia.

Over the past decade, russia has been a net exporter thanks to their booming oil and gas industries. They use these trade surpluses to build up 600 billion dollars of foreign currency reserves. They've basically been doing the opposite of what the us has been doing, living below their means and the people were forced to suffer under artificially high import prices. This was all done strategically.

So they would have sufficient reserves to prop up their currency in the event of future sanctions. It's no different than if you saved 10 of your income per year to build a rainy day fund if you ever get laid off in this case. Their savings account for the us dollars was the federal reserve, but right after the war began, the us, along with a consortium of its allies, froze 300 billion dollars of russia's currency reserves held at the fed european central bank bank of england and bank of canada. Imagine if you spent years building up ten thousand dollars worth of savings and deposited it at your local bank branch say you fell on hard times and want to withdraw your savings.

But when you try to use your debit card, it's declined. It turns out the bank froze your account effectively expropriating all of your money, because now they don't like you, that's basically what the us and its allies did to russia. We've all seen the atrocities that the russian military has committed in ukraine with much of the footage. Too graphic to be shown on youtube to be clear, we're not saying any of the sanctions against russia are not justified, but at the same time the decision to freeze the russian central bank's assets is perhaps the most extreme weaponization of the dollar that we've ever seen.

Many countries which are competitors or even adversaries of the us still rely heavily on u.s dollars because they need them for international transactions. For example, almost all international oil transactions are settled in u.s dollars. Multinational oil companies might sell oil to dozens of countries. It's much simpler to always make payments in u.s dollars instead of dealing with dozens of different currencies.

So, regardless of what you think about the us, you have to use u.s dollars, but seeing how the us froze russia's assets overnight. Many nations are now growing weary of this arrangement. Shortly after the ukraine war began, saudi arabia started negotiations with china to potentially start accepting chinese yuan as a payment for oil exports being as dominant as they are in heavy industries. China is the single largest importer of oil and accounts for 25 of saudi arabia's exports.

If they go through with this transition, the dollar's hegemony and the 14 trillion oil market would be severely challenged. The people's bank of china owns 3 trillion of foreign currency reserves. About half of which are thought to be u.s dollars, central banks globally hold 7 trillion dollars in dollar reserves compared to just 300 billion worth of chinese yuan. Seeing what happened to russia recently many countries will be keen to reduce their exposure to us dollars if oil exporting countries like saudi arabia transitioned to accepting chinese yen as payment.

This could have massive implications. Importing countries all over the world would start selling part of their us dollar reserves to buy yuan. In addition to foreign central banks becoming weary of us dollars, billionaires will also become weary of investing in the us or western europe. Under the code name, project klepto capture, the us and its allies have been systematically hunting down and impounding luxury yachts and real estate associated with so-called russian oligarchs oligarchs are rich.

Russian billionaires who the u.s intelligence agencies claim have ties to vladimir putin. Their investments in u.s hedge funds have also been frozen indefinitely. It's unclear what power, if any, of these so-called oligarchs have over vladimir putin, but one thing isn't near certainty. Foreign billionaires will start to think twice before making any significant investments anywhere.

The us government can get their hands on all. This will mean less demand for the us dollar, which will cause depreciation. If the us dollar loses its status as the global reserve currency, the country will, for the first time in 30 years, be forced to live within its means and import only as much as it exports that'll mean higher prices for imported goods, a piece of imported clothing Which used to cost twenty dollars could cost forty dollars instead, so you'll only be able to consume half as much to prop up the dollar. The fed could be forced to raise interest rates sharply dramatically, increasing the government's interest, expense and forcing them to raise taxes.

When and if this happens, american living standards could decrease dramatically in a very short period of time with all that being said, the dollar status as reserve currency has been built up over many decades, and the existing global financial system has been built on this premise. Dedularization would be a gradual process and take many years, but the more aggressive the us foreign policy becomes with regards to weaponizing the dollar, the more likely it will become. Alright guys that wraps it up for this video. What do you think about the weaponization of the dollar? Let us know in the comment section below also don't forget, to open an account with moomoo and get up to five free stocks, valued at up to seventeen thousand dollars, use the link in the description below.

As always, thank you so much for watching and we'll see you in the next one wall, street millennial signing out.